Depreciation in real estate is calculated based on which of the following?

Depreciation in real estate is primarily calculated based on the cost of the building rather than its market value or any operational income generated. The rationale behind this is that depreciation accounts for the wear and tear, deterioration, and obsolescence of the physical structure over time due to its ongoing use.

When a property is purchased, the cost of the improvements—specifically the building itself—is what typically serves as the basis for calculating depreciation. This cost is then allocated over the economic life of the structure, leading to a systematic reduction in its book value in the financial records.

Focusing on the specific elements involved, depreciation does not directly factor in fluctuations in market demand or the market value of the property; these aspects can fluctuate widely but do not change the underlying cost of the building. Thus, understanding depreciation solely in terms of the original construction cost is crucial for accurate financial projection and tax benefits associated with property ownership.